Buying a home takes a lot of research and a leap of faith. A home warranty is a popular way for home buyers to minimize their financial risk during the first year of ownership. A home warranty was included in 1.4 million of the 5.6 million homes sold in 2020, according to estimates from Frontdoor, one of the largest plan providers in the U.S.
Simply put, a home warranty for buyers can help protect a home investment. But before we dig into the financial nuts and bolts of a home warranty in a home sale, here are some warranty basics.
What Is a Home Warranty?
A home warranty is a service contract you purchase from a third-party company, often as part of a real estate transaction. It covers specific items in your home for a set length of time. One year is the most common term.
What Does a Home Warranty Cover?
Not to be confused with a homeowners insurance policy, a home buyer’s warranty offers protection against normal wear and tear for a home’s systems. Electrical, plumbing, and HVAC are typically covered, depending on the carrier, as well as certain major appliances.
Many home warranty providers offer a few different plans that vary by coverage and cost: a home systems plan, an appliance-only plan, and a plan that combines the two.
Plan add-ons: Pools, spas, septic systems, electronics and home automation, microwaves, and other small appliances aren’t typically covered, but providers often offer them as add-ons for an additional cost.
What Are the Benefits of a Home Warranty When Buying a House?
A home buyer’s warranty is a common addition to a home purchase contract. It can add peace of mind and potential cost savings during the first year of homeownership. Here are the main benefits.
Fewer out-of-pocket repair costs
Even if your home’s systems passed inspection at the time of sale, there’s no guarantee how long they’ll last. If something malfunctions or stops working after you move in, the bill is on you. And repairs can get expensive quickly. For example, fixing a broken central air conditioner will set you back $100–$650 on average. If the unit can’t be repaired, prepare to pay $3,500–$7,600 for a full replacement.
If you’ve spent most of your savings on a down payment and closing costs, you may not have much left over for emergency repairs. A home warranty reduces your financial risk during those first few months as you settle into your new home.
Ideal for the DIY-averse
For first-time home buyers who may not be familiar with the ins and outs of a home’s systems, a warranty can be a great option. It’s also a nice-to-have if you aren’t handy or experienced with DIY projects. A home warranty ensures certain repairs are performed by a vetted professional who is an expert in their field.
Lets you focus on the fun stuff
Finally, a home warranty gives you peace of mind, freeing you up mentally and financially for the more enjoyable parts of owning a home — furnishing, decorating, and making it yours.
What Are the Disadvantages of a Home Warranty?
If the seller pays for the warranty plan as part of the home sale (more on who pays for a home warranty in a minute), the advantages tend to outweigh any drawbacks. But using a home warranty service does come with a few caveats.
Lack of choice
When the seller covers the home warranty cost, they select the warranty company and plan. And when you file a claim, the warranty company chooses the service technician. The company also picks the make and model if you need a part or appliance replaced. If you prefer a certain contractor, manufacturer, or brand, you may be disappointed with the service.
Coverage misunderstandings are common
A home warranty offers protection against normal wear and tear on major home systems, but there’s a lot it doesn’t cover. That leads to misunderstandings about coverage and frustration over denied claims.
Read the fine print on the contract to understand exactly what’s covered. Pay close attention to coverage payouts (the maximum amount of money the warranty company will pay for a repair or replacement).
May increase your monthly housing costs
If you end up paying the warranty premium, it may feel like another expense that adds to your monthly housing costs. And if you never need warranty service, it may feel like a waste of money.
Who Pays for the Home Warranty in a Home Sale?
The short answer: it depends. In a balanced or buyer’s real estate market, a seller will often offer to pay for a home warranty to sweeten the deal and close the sale.
In a competitive (seller’s) market, buyers are usually more careful about requesting anything from sellers that could make their offer less competitive, including a home warranty and other concessions.
Bottom line: If a home warranty is on the table during your transaction, work with your agent to make sure it’s included in the contract.
How Much Does a Home Warranty Cost?
If the seller is paying for it, great news — a home warranty plan costs you nothing upfront. But if a home warranty isn’t included in your home sale agreement, not to worry. Anyone can purchase a home warranty at any time. If you end up warranty plan shopping, here’s a typical cost breakdown.
Home warranty policy: This is the total cost of the warranty premium and is the portion that a home seller may cover as part of a purchase contract. One-year terms are the most common, and you can usually pay monthly or in one lump sum.
Average annual home warranty policy cost range: $264–$840
Warranty service fee: This is your deductible, the amount you pay each time you submit a warranty claim.
Average service fee cost: $70
Costs for plan additions like a pool, spa, septic system, or smart home system vary by provider.
How Much Money Can a Home Warranty Save You?
Home repairs in the first year of ownership are common — 77% of buyers had to make at least one during the first year of purchasing a home in 2020. Of those homeowners, 53% spent between $1,000 and $5,000.
With a highest average policy cost of $840 and a $125 service fee, you could save money by purchasing a plan. And if the seller assumes the cost of the premium, all the better — the service fee is your only out-of-pocket expense.
Research Home Warranty Providers
A home warranty can reduce your home repair costs and add peace of mind during a home sale. When evaluating warranty plans, consider the age of your home and how much money you can set aside for emergency repairs. Check out Modernize’s guide to some of the best warranty plans to find the right one for your home.
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